Economic progress, social justice, individual liberty

Menu

Tax and the false dichotomy between private and public

I was reminded in a useful piece by Will Hutton in Sunday’s Observer newspaper of the way private income in a capitalist economy is underpinned in part by public action, much of it funded by taxation. The UK Prime Minister, David Cameron, recently claimed that “every single pound of public money started as private earning.” By contrast, in the US election campaign of 2012, Barack Obama tried to change the terms of the argument on tax and public spending by suggesting that private prosperity was supported by public action, in particular public infrastructure such as roads and other transport networks, public research and development etc. The Republican opposition in turn stated that Obama was being un-American and showing his contempt for the individual entrepreneur in doing so. What nonsense.

It is clear that private sector prosperity is supported by public action, so that it is in part dependant on it. This is not to denigrate the individual entrepreneur or the businessman more generally. In fact, it merely shows how government can provide part of the lifeblood of individual success. The private and the public spheres are mutually constitutive. As well as public infrastructure and the public regulation of utilities such as energy and water, public healthcare helps to ensure a healthy workforce. Public regulation shapes the legal environment that markets operate in and without which they would in many cases be dysfunctional. Even the welfare state, decried by many on the right as a disincentive to work, redistributes and stabilises flows of consumption across the economic cycle and in the longer term through pensions for the retired, which helps aggregate demand grow more steadily.

In fact it is useful to think of the public and the private spheres as in a symbiotic relationship, each supporting the other. Of course there can be waste and dysfunction in the public sector, as much as in the private sector, and those working in each should remain vigilant and try to improve performance where necessary. But the dichotomy between the public and the private only serves those who would attack the former and remain committed to an individualism which sees no scope for the public good. Our prosperity depends on rejecting this false dichotomy and recognising the benefits of public action for private prosperity and the prosperity of society more generally.

A simple example of public and private supporting each other is through flows of tax and spending. The private sector contributes to the public purse in paying taxation, funding public infrastructure which in turn supports business activity, as already mentioned above. Public funding sustains public goods and institutions which, through all their faults, are essential to a functioning capitalist economy. These goods and institutions may have been created some time in the past, but they can sustain private activity over long periods. They may need to be reformed and renewed as society evolves, and this is part of the process of government over time. Examples would be public research and development to support innovation, other forms of technology policy and the institutions of government more generally.

Big government can help to stabilise flows of spending in the economy during a recession. This Keynesian idea lends support to the automatic stabilizers: as the private sector slows and contracts, increasing unemployment, spending on benefits automatically rises, while income tax revenues from wages and profits fall, increasing the budget deficit and stabilising spending and GDP. A more Marxist point of view would hold that there are limits to this, and that recessions can stimulate restructuring of the economy, as weaker firms go bust, and stronger firms consolidate and restore a higher rate of profit to fund future investment and growth in the subsequent recovery.

An idea in the post-Keynesian tradition is that excessive income inequality will harm growth by distributing too much spending power towards the richest earners, who are more likely to save it than the poorer members of society, who will tend to spend all that they earn. Since growth in consumption is vital to stimulating investment, government can encourage growth through a redistribution of spending power to narrow inequality and support consumption growth. This is another example of how public action can fuel private prosperity.

Thus the claim that public spending all starts as private earning is only a partial truth. An examination of the process of generating prosperity moving back through time does not stop with private earning. Yes, public spending is funded by taxes on private earning, but the latter is also partly dependant on public action and spending, as well as individual and social action in the private sector. One could follow this chain of causation backward in time ad infinitum, demonstrating that it is more helpful to think of the public and the private as being in a relationship that runs both ways, one that is vital to social prosperity.

About Me

I have an MSc in development economics from SOAS, University of London and, while I now work for a charity, I remain passionately interested in the subject and how it can be used to promote sustainable human progress.
Apart from economics, I enjoy reading, walking, Qi Gong exercise, classical music, following professional tennis and athletics and spending time with friends and family. I also take an interest in politics, usually focussing on policy rather than personality, so that I don’t get too fed up with it.